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My first ever angel investmentwas made shortly after I cameto the UK about ten years ago.

I found a couple of young guys who wererunning a virtual hosting company calledDSVR in the suburbs of Manchester. Theyhad never been funded, but they had takenthe business from nothing to a turnover of£800,000 on a £10,000 overdraft. They didn’trealise how extraordinary that was. They weren’t profitable, but I could seehow they could be. I put in about £30,000,helped them renegotiate with their bankand service providers, and they went intoprofit. After just two years they were ontheir way to IPO, and I sold out – for a sillyreturn. I remember thinking, ‘This angelinvesting is a doddle. People will love me,and I’ll make loads of money.’ As you can imagine, that is not preciselywhat happened – in fact, my nextinvestments were all duds.

Angels and dragonsAngel investing is a bit like pregnancy, orstarting a business. If you knew what wasinvolved in advance, you would probablynever get into it. Having said that, there are some changeshappening that are making angel investing a lot more attractive. One of them iscrowdfunding, which is helping to make anilliquid market more transparent. There arealso the huge tax advantages introduced bythe UK government through the EnterpriseInvestment Scheme (see pages 16-17).Although Dragons’ Den has played its part in popularising the notion of angelinvesting, the real world is obviously a bitdifferent. You can get to know people, evenbecome good friends, before you invest.There isn’t that severity that comes withthe time pressure and the full glare of 4 million people watching.

What the show does capture accurately,however, is the difference in point of viewbetween the entrepreneur, who seeseverything rose-tinted, and the investor,who thinks it’s all going to pot – and thefact that they somehow have to findcommon ground. The simple fact is that there are twotypes of angel investing. There are thosebusinesses that only require the money youput in. Your return here will come frompreferred dividends or maybe the sale ofthe business; the risks are low, but therewards are likely to be reasonable ratherthan magnificent. With the second type, you are trying tofind the next Google. As an angel, you are atthe front end of a long pipe of investments,and with each new investor the companybrings in, the existing investors’ stake willbecome more diluted and the exit will beprolonged. If the business is successful, youhave to watch out for venture capitalists,who always try to take advantage of theangel investors. So you have to be reallycareful about how you pick this type ofhigh-growth investment. But the single most important rule ofangel investing is that you should only everinvest money that you can afford to lose.Please remember that, because if you don’t,bad things will happen. Best of luck with your angel investing –I hope you enjoy it as much as I do. ◆

Doug Richard

Doug Richard was one of the original ‘dragons’on BBC show Dragons’ Den. He now runsSchool for Startups, which provides help forbudding entrepreneurs. In 2012 Doug foundedthe Angel Society and his latest book, ‘How toStart a Creative Business: The jargon-freeguide for creative entrepreneurs’ is out now.

Foreword

‘Angel investing

is a bit like

pregnancy. If you

knew what was

coming, you

would probably

never do it’

Foreword

3WHAT INVESTMENT GUIDE TO ANGEL INVESTING – www.WhatInvestment.co.uk

He who dares

So what’s it all about?For many business angels, investing in growingcompanies is about much more than justfinancial returns. Nick Britton reports

6

First stepsSo you’ve got the money, will and nerve tobecome an angel investor. Rebecca Jones looksat how to get started

8

Getting hitched withoutany hitchesRob St George talks would-be angels throughthe courtship process in three simple steps

10

The taxman givethThe tax breaks afforded to angel investing arealmost ridiculously generous. Rob St Georgeexplains how they work

16

Contents


ContentsWHAT INVESTMENTEditor Nick Britton 020 7250 7035Deputy Editor Rob St George 020 7250 7066Senior Designer John HoweGroup Sub-Editor Alan DobieSales Manager Gordon Sockett 020 7250 7033Marketing Manager Samantha Coles Subscriptions Helena Smith 020 7250 7055

What Investment is published by Vitesse Media Plc, Octavia House, 50Banner Street, London EC1Y 8ST, Tel: 020 7250 7010. An annual subscriptionto What Investment costs £35.95 for 12 copies (UK) or £107 (rest of theworld). Claims for non-delivery must be made within 14 days.

To find out more about our best available subscription offers,call Helena Smith on 020 7250 7055.

ADVICE TO READERS:Information carried in What Investment is checked for accuracy, but we recommend that you make enquiries and, if necessary, take le gal advice before entering into any transactions.

ISSN 0263 953X. © Vitesse Media Plc.

All rights reserved in respect of all articles, drawings, photographs, etcpublished in What Investment anywhere in the world. Reproduction orimitations of these are expressly forbidden without permission of thepublishers. Editorial contributions requiring an answer should beaccompanied by a stamped self-addressed envelope. No responsibilitycan be taken for contributions lost or damaged in the post. Conditionsof sale and supply: this periodical is sold subject to the followingconditions, namely that it shall not, without the prior written consentof the publishers, be lent, resold, hired out or otherwise disposed of ina mutilated condition or in any unauthorised cover by way of trade. All advertising is subject to the terms of our current rate card.

In a world of complex financialproducts with opaque fee structuresand long chains of middle men, there’s

something refreshing about simply puttingsome money into a promising business. It’s a form of investment as old as thehills, but it’s been given a new spin by therapid growth of crowdfunding, wherebyhundreds or thousands of investors canbuy small stakes in businesses that pitchfor money online. Crowdfunding has been around for a while in various forms. There’s donationcrowdfunding, used by charities to raisemoney; reward crowdfunding, where yourinvestment is repaid with products orvouchers rather than money; and loancrowdfunding, which allows people orbusinesses to borrow funds from the ‘crowd’.

Taking a stakeEquity crowdfunding is the new kid onthe block. In the UK it was pioneered byCrowdcube, which funded its firstbusiness in December 2011. Since thennearly £9 million has been raised throughthe platform, and other UK-based equitycrowdfunding sites take that figure tomore than £10 million. As a measure ofhow fast this form of funding is growing,about half of this money has come induring the past few months.Like traditional angel investing,crowdfunding offers a deeper personalconnection between the funder and thefunded. But it has also given millionsmore people a chance to get involved inwhat used to be an activity that wasexclusive to the affluent. The government is firmly on the side ofangels. In 2011, it launched the £100million Angel CoFund, which investsalongside angel syndicates. It has also

expanded and enhanced existing taxbreaks for angels (see pages 16-17),making what is admittedly a risky assetclass a lot more attractive.

This guideWith the crowdfunding movement andthe taxman’s largesse creating thousandsof new potential angels, What Investmentand Crowdcube have come together toproduce a guide that is honest about boththe risks and the potential rewards. We’vespoken to expert investors, angel networksand experienced advisers to get uniqueinsights into the topic.The first part of the guide explains theconcept of angel investing and tries toquantify those risks and rewards, using theresearch that has been done in this area. Our second article explores the differentways to get involved in angel investing,from angel networks to crowdfundingsites – or even investing on your own. However you invest, this is one of thefew asset classes where you are morelikely to suffer a 100 per cent loss ormake a 100 per cent-plus profit thananything in between. Picking the rightbusiness is vital. The main feature in theguide focuses on how you make thiscrucial decision.And finally, we provide a full explanationof the tax advantages that are offered toangel investors through the EnterpriseInvestment Scheme (EIS) and SeedEnterprise Investment Scheme (SEIS). I hope you’ll find this guide useful andthat it whets your appetite to take a lookat the opportunities that are available forbecoming an angel. ◆

Nick BrittonEditor, What Investment

Comment

‘Like traditional

angel investing,

crowdfunding

offers a deeper

personal connection

between the funder

and the funded’

Comment


It starts here

People come to angel investing fora variety of reasons. ForGeorgina-Kate Adams, it was

about making a difference. ‘I was 24 when I invested – I’m 26 now –and I was in my first graduate job, withouta lot of disposable income,’ says Adams. ‘Iwasn’t necessarily looking for investmentopportunities. But the growth potential wasso obvious, I thought I had to get in quickbefore this explodes and everyone wants apiece of it.’Adams made her first investment in thecrowdfunding website Crowdcube, whichwas raising money through its ownplatform. ‘For me, a company I invest inhas to have a social purpose, a bit of heartbehind what they’re doing. Crowdcube wastransformative – it gave lots of start-upbusinesses the chance to raise money, whenthe banks are being so restrictive.’At the other end of the experience scale isPeter Zaboji, who used to work for theprivate equity giant KKR but has investedas an angel since 1998. ‘You have to beclear about your own motivations for beingan angel,’ is his opinion. ‘Pure financialconsiderations are not sufficient… You haveto develop a certain liking for the creative,passionate act of building a business.’

Feelgood factorThe very word ‘angel’ suggests that there isan extra dimension to this kind of investingbesides a cold, hard consideration offinancial returns. And yet the little researchthere is into those returns is quiteencouraging. In late 2008, Nesta and the UK BusinessAngels Association (UKBAA) surveyed158 UK-based angel investors, who hadmade 1,080 investments between them and

exited 406 of them. Those exits made anaverage of 2.2 times the invested capital –or an IRR (see box) of 22 per cent. There are quite a lot of caveats, however.To begin with, more than half of the exitedinvestments failed altogether – in otherwords, investors lost most of their money,and usually all of it. Very high returns onthe successful exits are what pulled up theaverage return to 22 per cent.

Zaboji has invested in 20 businesses as anangel. One of them, smart card technologycompany ACG, was phenomenallysuccessful, floating on the stock marketnear the peak of the tech boom in 1999.Zaboji won’t disclose his exact returns onthat investment but talks of a ‘hugemultiple’. Overall, however, he concedes hisportfolio of angel investments has been ‘amixed bag’.

You win some...The Nesta research ties in with Zaboji’sexperience. It found that 9 per cent of exitsproduced a return of more than ten timesthe capital invested, some of them over 30times. Those super-successful exitsproduced four-fifths of the cash returned toall investors in the survey. ‘Angel investing is not for the faint-hearted,’ sums up Matt Mead, head ofventure investing at Nesta. ‘A really smallnumber of winners subsidises a largervolume of failures. You have to understandthat dynamic before you dive in.’Jenny Tooth, chief executive of theUKBAA, also stresses that you can’t expectto get a 22 per cent annual return just byinvesting in one or two companies. Shereckons ten is a sensible minimum numberto aim for, though you don’t have to find

So what’s it all about?For many business angels, investing in growing companies is aboutmuch more than just financial returns. Nick Britton investigates

P

RO

FIT

LOSS

The concept


‘I wasn’t necessarily looking forinvestment opportunities. But thegrowth potential was so obvious’Georgina-Kate Adams

<1x (loss)

1x to 5x

5x to 10x

10x to 30x

>30x

Multiples achieved in angels’ exits

Source: Nesta/UKBAA survey

406exits

them all at once; you can build them upover a few years. She adds, ‘Returns are not gained quicklyor, often, without effort. The time taken forbusinesses to mature can be substantial.Conventionally, businesses offer a five-yearplan but maturation is now much morelikely to take seven or eight years andrequire further rounds of funding.’The Nesta/UKBAA research found thatit takes businesses longer to succeed thanto fail. The average holding period for afailed investment is three years; for asuccessful one, it’s six.

Are you experienced?If all this seems a bit forbidding, there areways to stack the odds in your favour.Number one is to make full use of thevarious tax reliefs available to you. Anannual return of 22 per cent over five yearsbecomes 25 per cent when you factor in theincome tax break you get from theEnterprise Investment Scheme (EIS), or 28per cent under the Seed EIS (SEIS). You’llget relief on losses and capital gains too(for more detail on EIS and SEIS, seepages 16-17). Crowdfunding websites andangel networks are geared up to helpinvestors with the admin. The Nesta/UKBAA research alsoindicated that those with entrepreneurialexperience, especially in the industries inwhich they invested, had a higher chance ofsuccess. Those who had founded more thanthree businesses were much more likely toget back more than ten times their originalcapital from an investment, as were thosewith specific industry expertise.Tooth suggests that those withoutindustry expertise can join a network orgroup to ‘pool experience’. Zaboji echoes

this: ‘For anyone starting out as an angel, Iwould recommend looking out for anexperienced partner who can guide you.Visit conferences, talk to as many investorsas possible.’

Do your homeworkThe other factor that vastly increases thechance of success is doing your homeworkon potential investments: what the pros call‘due diligence’. This sounds arduous, but theNesta research showed that even doing aslittle as 20 hours’ due diligence on aninvestment could greatly increase yourchance of success. Says Zaboji, ‘Visit

management teams, understand themotivation of the people who are asking youfor money.’ It doesn’t always have to be face-to-face; Adams says that she uses variousforms of communication such as phone,email and even Facebook and Twitter tokeep in touch with her investee companies.Although angel investing, in theory, canmake you very rich, that’s probably thewrong reason to go into it. Zabojiconcludes, ‘This is not about being abillionaire. That comes later. You have tolike what you do – creating a better world,giving young people a chance to getstarted.’ ◆

Business angel – someone who investsmoney into a private (unlisted) businessin return for an equity stake.

Exit – the termination of an angelinvestment. Successful exits usually comethrough the sale of the business, whilefailures usually involve the businesswinding up. Other possible exits includethe founders buying back the stake, or aflotation on the stock market (IPO).

Multiple – the sum of money returnedfrom an investment, divided by theamount invested. So £1 million returnedfrom a £500,000 investment is a ‘twotimes’ return (usually written 2x). The other way that angels commonlytalk about returns is as ‘IRR’ (the internalrate of return), which is an annualisedpercentage figure. A return of 2x over fiveyears, for example, is equivalent to anIRR of 14.9 per cent.

Jargonbuster

The concept


‘You have to develop a certain likingfor the creative, passionate act ofbuilding a business’Peter Zaboji

The advent of the internet hasmade sourcing investmentopportunities as easy as doing

your food shopping. With just a few clicks ofa mouse you could be investing anythingfrom £10 to £100,000 in a budding businesslisted on a website such as Crowdcube, withthe opportunity to chat with entrepreneursand other investors online. However, the more traditional avenues toangel investing – personal recommendations,attending pitching events, meetingentrepreneurs face-to-face – are still verymuch open to you. Which path you choosewill depend on how much money you haveto invest, how much time you have forresearch and your level of experience.

Angel networks and syndicatesTraditional face-to-face angel investing is notas frightening a process as Dragons’ Denwould have you believe. ‘That sort ofaggressive, confrontational style is not whathappens in most angel investing. It’s muchmore collaborative,’ argues Andrew Haigh,head of client propositions at Coutts. According to Haigh, traditional angels tendto be experienced business people who wantto work directly with an early-stage business,either for financial reward or simply to beinvolved. Often, they choose to join an angelnetwork or a syndicate, which gives themaccess to businesses in which they can investbetween £25,000 and £5 million. Typically, networks run monthly events inwhich investors hear pitches from a handfulof businesses selected by the network fromhundreds of applications. Angel networksdon’t generally deal with very early-stage(‘seed’) companies as they consider them toorisky. ‘We leave that to what we call the fourFs: friends, family, founders and typically,

fools,’ says Oliver Woolley, founding directorof angel network Envestors. Investing at this level is not open to all.Generally, you’ll need to be a ‘high net worthindividual’ with either a net income of£100,000 per year, or net assets of £250,000.Some networks have annual membershipfees ranging from around £150 to £350.

Online equity crowdfundingIf you don’t have a quarter of a million tospare, equity crowdfunding websites allowyou to invest for as little as £10. Crowdcube,founded by Luke Lang and DarrenWestlake, raised £4.4 million for businessesbetween January and May 2013 alone, whileits rival Seedrs has raised £1 million forstart-ups since its launch in September 2012. Crowdfunding requires less of a timecommitment than face-to-face angelinvesting, although websites like Crowdcubedo offer the opportunity to contact potentialcompanies and ask questions. Like networks,they will do some preliminary screening ofbusinesses, including fraud checks. The key difference between investing a

small amount of money via a crowdfundingsite and putting in five- or six-figure sums asa traditional angel lies in the small print.Traditional angels will typically negotiatevoting rights and pre-emption rights – whichmeans they have some protection against abigger investor coming along later anddiluting their stake in the business. However,if you invest £100 or even £1,000 via acrowdfunding site, you won’t usually getthose rights. Lang states that he is seeing an increase inthe number of wealthy, but ‘time-poor’individuals investing upwards of £50,000 onhis site. For this sort of amount, you shouldexpect to get shares in your investee businesswith full voting and pre-emption rights(sometimes referred to as ‘A’ shares). Some platforms, like Seedrs, work slightlydifferently. Using a ‘nominee system’, theplatform acts as the main investor in eachdeal with individual investors designated asbeneficiaries. The platform then exercisesvoting and pre-emption rights on behalf ofthe underlying investors. This doesn’t comefor free however, and you’ll pay a fee forSeedrs to manage your investment;Crowdcube, by contrast, is free to investors.

Other routesSome of the most experienced angels don’talways want to share, and prefer to find theirown opportunities. According to Haigh, thiscan be easier than you’d think, particularly ifyou’ve already had some success. ‘Normally, ifyou’ve sold a business and made a shed-loadof money, opportunities will just be thrownat you because people will just approach you,’he argues.Of course, personal approaches can presentproblems, particularly if they are from familyor friends. ‘This can be quite a difficult

Getting involved


First stepsSo you’ve got the money, will and nerve to become an angel

investor. Rebecca Jones looks at how to get started

moment,’ Haigh says, ‘as you’ve got to learnhow to turn those casual conversations intoa professional conversation.’ However,investing through personal networks canhave its advantages, not least a greaterinsight into the people behind the business. If you don’t have any entrepreneurialfriends, or doubt the strength of theirbusiness plans, a business accelerator orincubator may be a good hunting ground foropportunities. Often funded by universitiesor big companies, these are organisations

that offer coaching and mentoring to start-ups. According to chief executive of the UKBusiness Angels Association Jenny Tooth, agrowing number of accelerators areshowcasing businesses that have beenthrough their programmes, helping investorsto get involved at an earlier stage. A key advantage here is that a business maybe more attractive having gone through therigours of a coaching programme. BruceColley, investment network manager atOxford Investment Opportunity Network

claims that accelerators can add significantvalue to a business: ‘The companies that havecome through to us from growth acceleratorshave been more polished – they’re betterready and better prepared’, he argues.Unlike with angel networks or crowd-funding, the onus is on investors to makecontact with an accelerator. Your localuniversity might be a good place to start. Whichever route you choose, there’s littledoubt that it’s easier to become an angelthan ever before. ◆

‘The aggressive, confrontational style you see on

Dragons’ Den is not what happens in most angel investing’

Ways to get involved in angel investing


Getting involved

Angel networksand syndicates

£10,000 - £25,000 Beer and Partners, CambridgeAngels, Cambridge Capital,Envestors, London Business Angels,Minerva, Oxford InvestmentOpportunity Network, Thames ValleyInvestment Network, Xenos (Wales);Halo (NI), Finance South East

£0-£350 a year

Mainly invest in syndicateswith lead angel, though canalso be sole investor. Typicallygain larger stake in businesswith more involvement andopportunity to supportstrategic growth

Larger amounts of capital,personal time andunderstanding required,especially as a lead angel

Investmentvehicle

Typical minimuminvestment

Main players Typical fees Pros Cons

Online equitycrowdfunding

£10 Crowdcube, Seedrs, Crowdbnk,Crowdmission, Gambitious, Sharein

0-7.5% on gains

Can invest smaller amounts,potentially across morebusinesses. Less personaltime required

Typically smaller stake inbusiness with less personalinteraction with founders.Smaller shareholders haveno voting rights orprotection against dilutionof shares

Businessaccelerators andincubators

Varies Growth Accelerator, Wayra, Schoolfor Creative Start-ups, InnovationWarehouse, Seedcamp, Level 39,Entrepreneur First, AcceleratorAcademy, Tech Stars, Healthbox

Nonespecified

Possible to invest solely or in asmaller group. Business maybe advantaged as a result of itsparticipation in programme

No direct route to investin this way, thus moretime is needed for researchand contact

Personalnetworks

Varies n/a You and theinvesteebusiness willcover anycosts

Business or entrepreneurmay be a personal contact,or related to your businessinterests giving you greaterinsight

Can be difficult to translatea personal relationship intoa professional one,especially without the rightlegal protections

Picking a winner


Step 1: Courtship

Angel investing is a long-termcommitment. It’s easy to beswept up in an initial passion,

but you need to know your partner wellbefore saying ‘I do’ to a potential investment. Before anything else, angels should thinkabout the business’s growth stage. ‘Peoplehear about angel investing and they think ofstart-ups,’ laments Matt Taylor, managingpartner at Rockpool Investments. ‘You needto make sure those two things are not equalto you. You can back profitable companies.’

Early-stage businesses (‘seeds’) may be‘pre-revenue’, which means they have nosales yet, or ‘pre-profit’, which means theyhave sales but aren’t making money. At theother end of the scale, it is possible to investas an angel into more mature, profitablecompanies: a less risky route that can stilldeliver decent returns. The business’s eligibility for tax reliefs isanother thing to think about straight away.‘Although the tax reliefs do not dictate ourinvestment decisions per se,’ imparts MarkPayton, managing director of Mercia FundManagement, ‘if they are not available wewill not invest.’ See pages 16-17 forguidance on these tax breaks.Once an investor is happy on those two

fronts, the real courtship can begin. This willrevolve around the company’s three Ms –which have nothing to do with moonlight,music or movies.

ManagementA recent Crowdcube study into the attitudesand motivations of crowdfunding investorsshows that they are influenced by thebusiness idea, its market potential, and theentrepreneurs’ experience. The experts wespoke to agree that a company’s managementis absolutely key. Payton says he is lookingfor ‘a sparky founder with a clean balancesheet and who is cash focused’.There are also possible alarm bells. ‘Ifthere’s any hint you can’t trust them or deal

Getting hitched without any hitchesRob St George talks would-be angels throughthe courtship process in three simple steps

Picking a winner


with them in difficult circumstances, youshouldn’t go near it because there areabsolutely going to be crises,’ reports RichardHargreaves, co-founder of EndeavourVentures and former chairman of the BritishVenture Capital Association. John Glencross, chief executive ofCalculus Capital, concurs: ‘If it becomesclear that a management team lacks theperceived qualities needed to grow itsbusinesses profitably, we will walk away.’

ModelProvided the manager is giving out noobvious danger signals, the investor canmove onto something they can get to knowvery well: the company’s business model. The box on the right gives an idea ofsome good questions to ask. Companiesshould be able to provide ready andconvincing answers. Thanks to the internetand social media, it is easier to test claimstoo. ‘Follow the company on Twitter to seewhat it’s doing and saying,’ mentionsHarald Nieder, a banker who has investedthrough Crowdcube.You don’t need a management degree, butindustry knowledge is helpful. ‘If I look at asoftware business, I have some idea of howit works, who has done what, and the kindof prices on which you might be able toexit,’ says Hargreaves. ‘On the other hand, Ican understand wind farms but I don’t startfrom knowing all the issues that arise –who makes wind turbines and how reliablethey are.’With that background context, investorscan think about how the company willcomplement or challenge the status quo.Russ Shaw, founder of Tech LondonAdvocates, likes those that attempt thelatter. ‘If I do any angel investing,’ he sets

out, ‘I am looking for disruptive businessmodels. Yes, it is risky, but the realbreakthroughs come from companies thatchallenge conventional norms.’One such upstart that he has backed isAmazing Media, a Gateshead-basedenterprise that promotes and distributesmusic while eschewing labels and –something few of them do – makingmoney. Shaw, who served at Telefonica andSkype, is no music guru, but was sold onthe opportunity because its pitch madeintuitive sense. ‘I want a company to conveyto me in a few minutes its mission andwhere it’s going,’ he divulges. ‘If it’smuddled, I’ll walk away. If I don’tunderstand it, the broader marketplace isalso not going to be clear.’Finally, the business has to be scaleable

(easy to grow) if it’s to be worth significantlymore a decade hence. For this reason,Hargreaves likes investing in the tech space.‘If you’re selling a piece of software,’ heargues, ‘it costs you nothing to produce moreonce you have done the development. If thebusiness is in retail, every time you open astore it is going to be loss making initially.’

MoneyAnd so we come to the financials. On this,the experts have divergent views. Someinsist on a verifiable track record toevidence the business model; those who dounderline profits and cash flow as the keymetrics, rather than revenues. ‘If thecompany cannot generate cash,’ professesHargreaves, ‘it cannot survive.’Poring over the accounts is most relevantfor more mature enterprises. Paytonremarks that he is ‘all over their financialslike a rash’, while Glencross stipulates‘realism’ and ‘the security of knowing thatforecasts are based on solid businessprojections rather than pipe dreams’.Assessing a younger company’s financialsinvolves more guesswork and faith. SaysHargreaves: ‘You can believe a company’sprojections, but you would probably be afool if you did.’Shaw is more focused on potential thanprofits, which he ascribes to his Americanbackground. ‘The first number I look at isthe top line,’ he asserts. ‘I want to see therevenue; I am not so fussed aboutprofitability. I want to know it can comedown the line, but I would rather seerevenue growth in the near term.’ He is‘incredulous’ that some UK angels ask aboutdividends. ‘Why are you investing in thisbusiness if you’re looking for dividends? Ifthat’s what you want, go to the FTSE 100.’

‘You can believe a company’s projections, but

you would probably be a fool if you did’

1. Can you build a leadership position ina niche market?2. Can you then defend that marketposition?3. How much money will you need toachieve this?4. Can you generate revenues from thatposition?5. Can you ultimately turn thoserevenues into profits and cash?6. Are the revenues, profits and cashgoing to be predictable and recurring?7. Can you scale up quickly to growfurther and will you need more moneyto achieve this? 8. How will you achieve an exit for yourshareholders? (For example, who wouldbe the likely buyers of the business?)

Courtship checklist

Step 2: Engagement

With sufficient comfort onthe three Ms, an angel canprogress to the nitty-gritty

of the deal making. In advance ofeverything else from this stage, Paytoncounsels working with others as much aspossible. ‘We are big fans of syndication,’he states. ‘We will look at a business andits capital needs, and then make sure themajority of that will be available from dayone.’ He tries to ensure that anysubsequent funding rounds tap only thesame initial investors to minimise the riskof dilution (see page 8).

ValuationFor Hargreaves, ‘Valuation is a black art.’Payton characterises it as ‘a subtlecombination of negotiation and a host ofmetrics’.A spate of high-profile recent deals hasnot helped matters. ‘The entrepreneursread that Facebook is worth X billion andInstagram has been bought for Y billion,so think they can offer 10 per cent for £1million,’ Hargreaves rues. ‘That is for thebirds and they need to be disillusioned. Ifanyone does put money up on that basis,good luck to them. And of course if theyneed money later, it is very unlikely thatthe price will be as high. Then you get agreat deal of grief.’Rather, Payton proposes a standardisedmethod for arriving at a value. He takesthe price and date at which he hopes tosell the business, and then discounts itback to the present day at a rate ofbetween 30 per cent and 50 per cent a

year (the return he hopes to make). If heexpects to sell it for £10 million in fiveyears’ time, for example, he might reducethat price by half five times to reach anentry price of £312,500.In addition, he will use standard valuationratios such as price-to-earnings multiplesand industry comparators – although heconcedes these are difficult to obtain – as asanity check.Finally, Payton ensures the company istrying to attract an acceptable level offunding overall: typically between £200,000and £700,000. ‘The founder will struggle toraise any more than that, irrespective of thetype of business or opportunity,’ he reckons.‘If the number does not fit into the range,it is unlikely that we will do it.’For this investment, Payton expects astake of between 20 per cent and 40 percent in the business.Hargreaves demurs from this approach.‘Discounting back to a value is nonsensebecause there are so many assumptions in

the projections,’ he warns. ‘You need to askhow long the money is going last. If it’sonly going to last for two months, theywill be back for more. ‘They often ask for £1 million andpromise they’ll never need any more.Experience says that is almost never true.It’s not to say people aren’t being honest,but there is a great deal of optimism thatgoes into projecting how a company willdevelop. Maybe entrepreneurs have tohave that level of blind optimism to keepgoing when others would have stopped.Most of the things I have seen haveneeded more money and taken longerthan was expected at the time.’With such uncertainty, Nieder prefers asimpler approach to valuations. ‘My rule ofthumb is how much you get for £5,000,’ heopines. ‘If someone only gives you 0.1 percent of the company for £5,000, it’s notimmediately interesting.’ He acknowledges,nonetheless, that ‘it could be expensive fora reason’.

Picking a winner


The pre-nupIf valuing a private company is shrouded inobscurity, angels should at least be able tosecure more assurance from the contractgoverning the investment. ‘At the time of investment we have adetailed agreement which clearly sets outour rights and which contains warrantiesabout the accuracy of the informationprovided by the company,’ relaysGlencross. This, clearly, should be aminimum requirement for anyoneinvesting a sizeable sum.Payton also puts in place a 12-monthplan against which he monitors the firm.‘We don’t just throw money over the fenceand hope in five years’ time we’ll getsomething back,’ he comments. ‘If we did,my sneaking suspicion is that we wouldn’tget anything.’This plan is overseen by a representativeon the company’s board, something whichall the experts demand. ‘We never controlthe board,’ Payton admits, ‘but weobviously influence it.’The clearest, and frequently earliest, signof trouble after an investment comes fromremuneration. ‘The alarm bell rings whendirectors were paid one thing before theinvestment and then suddenly they all getfantastic salaries,’ observes Payton. ‘We payacute attention to the directors’ salaries.’It is a problem familiar to Hargreaves,

and he specifies pay limits in theshareholder agreement. ‘There will be arule on the salaries of the people runningthe venture,’ he confirms. ‘The deal is thatwe are putting the money up; you can’thave the same salary you would get from anice fat job in Microsoft.’Another way in which he seeks toimpress capital discipline upon hismanagers after the investment is to stressthat he is not simply turning on a tap andleaving it running. ‘They must realise thatwhen they use up the money, there is noguarantee there is going to be any more,’he avers. ‘They must treat it with thegreatest of respect.’Yet ultimately, angels have to accept therisks. ‘You can write a classic shareholderagreement,’ feels Hargreaves, ‘but it’sprobably not going to be worth the paperit’s written on. It’s mostly down to trust. Ifyou don’t believe in the management, don’ttouch it.’Payton echoes the caution. ‘If a businessfails to deliver and suddenly you need tolook for new investors to bail the businessout,’ he believes, ‘no matter what level ofcontrol you have you will get diluted andpunished.’Nieder has some succinct guidance thatechoes the words of many an experiencedangel: ‘Only invest what you can afford tolose. That’s your best protection.’

Picking a winner


Most angel investors will only get a returnon their money when the company they’veinvested in is sold. For Jenny Tooth, chiefexecutive of the UK Business AngelsAssociation, it’s essential to bear possible

exits in mind from day one. ‘You need tobe strategic about how the company isgoing to be bought, right from the start ofthe investments, aligning your interestswith the entrepreneurs’ at every stage.’

The exit

East End Manufacturingraised £150,000 throughCrowdcube to expand itsfactory. Founder BarryLaden explains how theprocess worked.

I started my company with a modestfactory in the East End, but after a fewmonths of supplying various small clientsI noticed that larger customers were putoff by the small size of our operation. Irealised I needed to raise £150,000 forexpansion and extra machinery.Crowdfunding isn’t some easyalternative to banks or other funding.You still have to have an excellent pitch,robust financials and a super businessplan for it to be attractive to investors. Valuing an early-stage business is neveran exact science. The figure of £750,000I felt was appropriate to where wewould be in the first year of trading inthe new premises, and a smallishmultiple of that in terms of profits. I don’t believe shareholders should justpay money in and feel they won’t becontributing. An ongoing relationship isimportant. Right from the start, I wasadamant that all shares would be Ashares, with full voting rights. There is always going to be an exit,whether that is in business, orrelationships, or whatever. In my case Ihave considered a future flotation onone of the smaller markets. We have71 investors who potentially could beour early investors into an IPO, whichis exciting.

The business perspective

Step 3: Marriage

Agood angel won’t resignthemselves to being a passiveshareholder. If you’re

confident in the managers and model, youcan still contribute to the business.In Hargreaves’s experience, this mostcommonly entails helping a foundercommercialise the idea – and occasionallyovercoming their reluctance to do so. ‘In an ideal world, you are looking for abalanced team that has vision, technicalcapability, and financial organisation,’ heoutlines. ‘You are not likely to find that ata very early stage. Part of the investor’sjob is to make the managers realise theydo need to evolve and bring other peopleinto the team. It may be that you have topersuade the founder that he is not thecorrect person to be chief executive, butwithout losing him. It has to be donesoftly because you don’t want fisticuffsaround the board table.’

Tough loveThe most difficult part of this, Hargreaveshas found, is introducing sales disciplineto a start-up. ‘Young companies tend tounder price, thinking that doing so willhelp make the sale,’ he says. ‘That is notgenerally the case. The buyer has a needand asks whether the product satisfies it.If the answer is yes, the need is strongenough and there aren’t many obviouscompeting alternatives, he will be lessprice sensitive.’ A wise angel can boost abusiness immensely by helping managersunderstand this, as well as by challengingtheir assumptions – perhaps that a

one-off fee is the only way to operate,when a monthly subscription could bemore efficient.Equally, investors need to beware steadystreams of excuses for underperformance.‘The danger sign is when you keep seeinglimited sales but there is always a goodstory as to why everyone is going to buyin the future,’ says Hargreaves. ‘If thereare constant excuses, and names keepdropping out of the sales pipeline only tobe replaced by new ones without anydeals happening, you have to ask whetheranybody wants the product.’

Hands offShaw is happy to leave his companies to it,though. ‘I am buying into the manager andthe business model. I should really stay outof the way,’ he supposes, ‘but I am alwaysat the end of the telephone if they wantany advice. I let them get on with it. I havetoo many other things to worry about.’On the face of it, crowdfunding might

seem to offer more of a long-distancerelationship than a close union. But LukeLang, co-founder of Crowdcube, says thatit doesn’t have to begin and end with anonline transaction. He points out thatmany investors on Crowdcube take oninformal mentoring or advisory roles, andeven more formal directorships. Even if that’s not for you, the crowd hasgreat power when it comes to creating abuzz around a company. Georgina-KateAdams, who has invested throughCrowdcube, says that she likes the‘personal involvement you get frominvesting in start-ups’, adding, ‘You candrop the founder a line and feel proud ifthey get a great press article. You cantweet about them, show your support.’This sort of word-of-mouth advocacycan be invaluable, especially for consumerbusinesses, and a savvy founder willunderstand how to exploit the specialrelationship the business has with itsshareholders. ◆

Picking a winner


‘You may have to persuade the founder he is not

the right person to be chief executive’

Picking a winner


‘There are no investment fees – it’s your

money, your risk and your reward’

Investing in start-up, early stage andgrowth businesses in exchange for an equity stake can be a rewarding

experience; research from Nesta and theUK Business Angel Association (UKBAA)supports this by reporting an IRR of 22per cent on invested capital from angelinvestors in their 2008 report. Crowdcube is designed to makeinvesting more accessible, straightforwardand rewarding. Our online approach hastransformed an age-old industry and hasproven to be the catalyst for the birth ofa new breed of angel investor – thearmchair dragon!Permitting people to invest moremodest sums of money has provenpopular for new investors dipping theirtoe into equity investments for the firsttime, as well as seasoned angels wishingto spread their risk capital further.

Due diligence and diversification To make due diligence easier allbusinesses are vetted by Crowdcube andmust present business plans and threeyears’ financial projections for review. Asan investor, you may receive voting andpre-emption rights that you’d expectfrom a typical business angel investment. Diversification should always be a keycomponent of any investment strategy to help manage risk. With a steady

stream of start-up, early stage andgrowth businesses in a variety of sectorsthat will satisfy any risk appetite,investment preferences and budget, ithas never been easier to build a broad,diverse portfolio.

The majority of businesses qualify for all-important EIS and SEIS taxincentives and may be interested inexperienced investors taking an activerole in their business. What’s more, thereare no investment fees, either upfront orwhen the company exits – it’s yourmoney, your risk and your reward.

More than moneySince launching in 2011, Crowdcubehas attracted over 36,000 registeredinvestors with over 5,000 self-certifiedas high-net-worth individuals orsophisticated investors. Members caninvest from as little as £10, but morecommonly it’s several thousand pounds,with £250,000 the largest singleinvestment to date. For many, investing is often aboutmuch more than just money. Harnessingthe right experience and expertise is alsovital to success. Informal mentoring andadvisory roles, as well as more formaldirectorships and non-executivedirectorships are commonplace onCrowdcube and can make the differencebetween a good and great company. Whether you’re a novice or experiencedinvestor the high-risk nature of suchinvestments commands caution and acomplete understanding of the risksinvolved before you invest. Althoughrewards may be high, the golden rule toonly invest what you’re happy to loseapplies more acutely with angel investingthan other forms of investment. Best ofluck and enjoy the experience of backingGreat British businesses. ◆

Luke LangLuke Lang co-foundedCrowdcube in February2011. Crowdcube is theworld’s first equity-basedcrowdfunding platform

helping British start-ups and growingbusinesses raise over £9.5 million pounds infinance from a nation of ‘Armchair Dragons’.www.crowdcube.com/whatinvestment

Equity crowdfunding:a new way to invest

55businesses funded

5,000investors self-certified as high net worthindividuals or sophisticated investors

36,000registered investors in total

£9.5 millionsuccessfully invested

www.crowdcube.com/whatinvestment

Though they should never beseen as a reason for investing inthemselves, the tax advantages

offered by the Enterprise InvestmentScheme (EIS) and Seed EnterpriseInvestment Scheme (SEIS) are some of themost generous around. Businesses lookingto raise money from angels are well awareof this. Luke Lang, co-founder ofCrowdcube, says that 98 per cent ofbusinesses funded through the platformhave been eligible for EIS or SEIS.Let’s start off by looking at what happensin the worst-case scenario. If someoneinvests £10,000 in a company that iseligible for EIS relief, and that companyends up going to the wall, the immediate30 per cent tax refund takes the initial costof that investment down to £7,000 –assuming the investor has an income taxliability of at least £3,000. Add to that 40per cent loss relief, which takes off another£2,800 from that £7,000, and the investorends up with a final loss of just 42 per centon an investment that lost 100 per cent. Ifthe investor is a higher-rate taxpayer, you’relooking at an even smaller 35 per cent loss.The SEIS deductions are even moregenerous, although not as generous as theyused to be. Last year, full loss protectionwas available: equivalent to 100.5 per centof the investment for top-rate taxpayers.You literally could not lose. That was never going to last, and sureenough, the rules have changed slightly forthe 2013/14 tax year. The capital gains taxdeferral relief is available on just 50 percent of the capital gains now, up to a limitof £50,000; it used to be 100 per cent. Thedownside protection is now 86.5 per centfor failed investments.Thus, from the same £10,000 input

under SEIS, you get an instant £5,000back against income tax liability, £1,400 ofsavings from a one-off capital gains taxreinvestment relief and £2,250 in lossrelief, leaving you with a loss of £1,350 ifyour investment completely bombs. Ofcourse, this all presumes that you have anincome tax liability of more than £5,000and taxable capital gains worth £10,000.This is obviously still a substantial

incentive, and it’s what has attracted somany to the space. ‘EIS has made it mucheasier for me to consider angel investing,’remarks Russ Shaw, founder of TechLondon Advocates.

Accentuate the positiveGiven that most angel investments fail (seepages 6-7), the downside protection ispretty useful. But it’s only half the story,and the other half is much more cheerful.‘The tax relief smoothes the journey whileyou wait for the capital-gains tax-freereturns,’ comments Mark Payton, managingdirector of Mercia Fund Management.Say your £10,000 investment doubles to£20,000. You’ll not only get the full benefit,with no capital gains tax (CGT) to pay, butan extra £3,000 on top from the incometax relief. With the potential of angel investmentsto deliver many times your original stake,it’s the CGT exemption that should reallyset pulses racing, especially in a worldwhere such perks are increasingly hard tofind. ‘All forms of aggressive taxavoidance are now off the radar, so

The taxman givethRob St George unpicks the tax advantages of EIS and SEIS investments

No more than 20 per cent of thecompany’s activities may involve thefollowing:

n dealing in land or property developmentn any financial activities, such as banking,money-lending or dealing in sharesn receiving royalties or licence fees (unlessthe company has created the intellectualproperty)

n legal or accountancy servicesn farming or forestryn shipbuildingn coal or steel productionn managing hotels or nursing homesn generating electricity that will attract afeed-in tariff (with certain exceptions)

This is an abridged list; for the full rules, seeHMRC’s website.

Excluded trades

EIS & SEIS


investors want mainstream tax planning,’reports John Williams, managing partnerat Kuber Ventures.Other vehicles favourably treated by thetaxman have severe drawbacks. Assets putinto self-invested pensions, for instance,cannot be accessed until the holder is 55.ISAs can only take in £11,520 each year.This is why EIS is becoming what Williamsterms the ‘key arena’ for tax planning.A particularly interesting aspect relates toinheritance tax (IHT). ‘There are a few

financial advisers suggesting EIS portfoliosto relatively elderly clients, predominantlybecause of the IHT benefits,’ Williams hasfound. ‘Normally you have to give awayassets to get a benefit from inheritancetaxation. This is one of the few areas whereinvestors can retain the assets in their namebut at the same time remove them fromtheir estate for IHT purposes.’For such reasons, Williams regards the EIScombination of loss relief and tax-freegrowth as ‘a win-win scenario’ for investors.

EIS & SEIS


EIS versus SEIS (2013/14 financial year)

Notes: Prior to claiming tax relief, investors must receive an EIS3 form from the company; the forms can only beissued after the company has been trading for at least four months. Genuine commercial liquidation of thecompany does not result in the withdrawal of tax relief. Source: HMRC

Maximuminvestment

£1,000,000 £100,000

EIS SEIS

Income tax relief 30 per cent 50 per cent

Dividends Taxable Taxable

Capital gains tax Exempt after three years Exempt after three years

Inheritance tax Exempt after two years Exempt after two years

Offsetting losses Possible against incometax or capital gains tax

Possible against income tax or capital gains tax

Capital gainsreinvestment relief

None For this tax year, 50 per cent of capital gains tax onother investments can be reclaimed if that amount isreinvested in SEIS

Business age No restrictions Less than two years old

Investor restrictions Cannot hold more than30 per cent of company

Cannot hold more than 30 per cent of company

Business size Maximum gross assetsof £15 million and nomore than 250 staff

Maximum gross assets of £200,000 and no more than25 staff

‘The tax advantages are extremelycompelling,’ he summarises, ‘as long as theunderlying investments marry up to theindividual’s objectives.’

Check yourselfThat said, there are pitfalls investors mustbeware. ‘The most important thing is totake care because it really is an absoluteminefield,’ urges Richard Godmon, taxpartner at accountancy firm Menzies.‘People understand the headline tax reliefs,but not how complex the legislation is andhow easy it is to lose those reliefs. That canhave a disastrous effect on the efficiency ofthese investments.’The table and checklist of prohibitedbusiness types illustrate some of the potentialproblems that could arise. Even the obviousones can be overlooked: the company’sworkforce must not exceed the statedmaximum, nor its assets, and the investor canforgo the favourable tax regime simply bytaking more than a 30 per cent stake. Somethings will not always be within the investor’scontrol either. For instance, the SEIS mustspend the funds raised within three years. Most fundamentally, the investor shouldensure the company can provide a certificatefrom Her Majesty’s Revenue and Customsconfirming that it is an approved EIS.In any case, investors are best advised toconcentrate on the product rather than thewrapper. ‘Your overriding concern should bethe soundness of the company,’ Williamsrecommends, ‘not the tax relief.’But once that soundness has beenestablished, tapping it through such ascheme makes perfect sense. ‘EIS translatesquite good returns into excellent returns,’concludes Richard Hargreaves, co-founderof Endeavour Ventures. ◆

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